Hanmi Financial : Earnings Release Q2 2023

NEWS RELEASE

Hanmi Reports 2023 Second Quarter Results

LOS ANGELES - July 25, 2023 - Hanmi Financial Corporation (NASDAQ: HAFC, or "Hanmi"), the parent company of Hanmi Bank (the "Bank"), today reported financial results for the second quarter of 2023.

Net income for the second quarter of 2023 was $20.6 million, or $0.67 per diluted share, compared with $22.0 million, or $0.72 per diluted share, for the first quarter of 2023. Return on average assets and return on average equity for the second quarter of 2023 were 1.12% and 11.14%, respectively.

Net income for the first half of 2023 was $42.6 million, or $1.39 per diluted share, compared with $45.7 million, or $1.50 per diluted share, for the first half of 2022. For the first six months of 2023, return on average assets and return on average equity were 1.17% and 11.66%, respectively.

CEO Commentary

"Hanmi delivered solid results for the second quarter, reflecting our team's steady execution of our relationship banking strategy during this period of rising interest rates and uncertain economic conditions," said Bonnie Lee, President and Chief Executive Officer of Hanmi Financial Corporation. "These results were supported by healthy deposit growth, disciplined expense management and strong credit administration.

"We grew deposits by 1.9% with solid contributions from both new and existing customers, a testament to the success of our relationship banking model. Importantly, our Corporate Korea initiative contributed significantly to new deposit growth in the quarter. Hanmi is uniquely positioned to capture greater market penetration as Korean corporations continue to expand their U.S. operations.

"As expected, our loan production year-to-date has been impacted by lower demand due to escalating interest rates. That said, we are encouraged that our loan pipeline began to grow as we entered the third quarter. Even so, we will continue to take a selective and disciplined approach to lending in the current environment with a focus on attractively priced loans and high-quality borrowers who also have a deposit relationship with Hanmi.

"We are well-positioned to navigate the remainder of the year with a strong base of loyal customers, a growing pipeline of new opportunities, a healthy balance sheet and liquidity position, excellent credit quality and an outstanding and dedicated team."

Second Quarter 2023 Highlights:

• Second quarter net income was $20.6 million, or $0.67 per diluted share, down 6.2% from $22.0 million, or $0.72 per diluted share, for the first quarter of 2023 and reflects lower revenues, higher noninterest expenses and no significant credit loss expenses.
• Loans receivable were $5.97 billion at June 30, 2023, down 0.3% from the end of the first quarter and essentially unchanged from year-end; loan production for the second quarter was $259.3 million with a weighted average interest rate of 7.39%.
• Deposits increased 1.9% sequentially to $6.32 billion at June 30, 2023 and were up 2.4% from year-end;noninterest-bearing deposits were 34.9% of the deposit portfolio at June 30, 2023.
• Net interest income was $55.4 million for the second quarter, down 4.2% from the first quarter primarily due to higher deposit interest expense.

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• Net interest margin (taxable equivalent) was 3.11% for the second quarter, down 17 basis points from the prior quarter; sequentially, the average yield on loans increased 13 basis points while the cost of interest- bearing deposits increased 52 basis points.
• Noninterest income for the second quarter was $7.9 million, down 4.8% from the first quarter, primarily on lower SBA gains; second quarter noninterest income included a $1.9 million gain from a litigation settlement offset by a $1.9 million loss on the sale of securities.
• Noninterest expense was $34.3 million, up $1.5 million, or 4.5%, from the first quarter; second quarter expenses included a $0.7 million increase in FDIC insurance expense while first quarter included $0.6 million of recoveries of other real estate owned expense and an SBA servicing asset valuation allowance; the efficiency ratio for the second quarter was 54.11%.
• Credit loss expense for the second quarter included a $0.5 million provision for loan losses and a $0.6 million recovery for off-balance sheet items; the ratio of the allowance for credit losses to loans was 1.19% at the end of the second quarter.
• Criticized loans declined 25.2% from the first quarter and stood at 1.4% of loans at quarter-end; nonperforming assets were $22.3 million or 0.30% of total assets at June 30, 2023.
• Hanmi's ratio of tangible common equity to tangible assets was 8.96% at June 30, 2023 and it had a preliminary Common equity Tier 1 capital ratio of 11.91% and a Total capital ratio of 15.12%.

For more information about Hanmi, please see the Q2 2023 News & Events section (and Supplemental Financial Information), which is available on the Bank's Investor Relations section of the corporate website at www.hanmi.com. Also, please refer to "Non-GAAP Financial Measures" herein for further details of the presentation of certain non-GAAP financial measures.

Quarterly Highlights

(Dollars in thousands, except per share data)

					As of or for the Three Months Ended						Amount Change
		June 30,			March 31,		December 31,		September 30,			June 30,			Q2-23			Q2-23
		2023			2023			2022			2022			2022			vs. Q1-23			vs. Q2-22
Net income	$	20,620	$	21,991	$	28,479	$	27,169	$	25,050	$	(1,371)	$	(4,430)
Net income per diluted common share	$	0.67	$	0.72	$	0.93	$	0.89	$	0.82	$	(0.05)	$	(0.15)
Assets	$	7,344,924	$	7,434,130	$	7,378,262	$	7,128,511	$	6,955,968	$	(89,206)	$	388,956
Loans receivable	$	5,965,171	$	5,980,458	$	5,967,133	$	5,800,991	$	5,655,403	$	(15,287)	$	309,768
Deposits	$	6,315,768	$	6,201,038	$	6,168,072	$	6,201,376	$	5,979,390	$	114,730	$	336,378
Return on average assets		1.12%			1.21%			1.56%			1.52%			1.45%			-0.09			-0.33
Return on average stockholders' equity		11.14%			12.19%			15.90%			15.58%			14.92%			-1.05			-3.78
Net interest margin		3.11%			3.28%			3.67%			3.66%			3.55%			-0.17			-0.44
Efficiency ratio (1)		54.11%			49.54%			46.99%			46.22%			46.05%			4.57			8.06
Tangible common equity to tangible assets (2)		8.96%			8.77%			8.50%			8.40%			8.74%			0.19			0.22
Tangible common equity per common share (2)	$	21.56	$	21.30	$	20.54	$	19.60	$	19.91			0.26			1.65

1. Noninterest expense divided by net interest income plus noninterest income.
2. Refer to "Non-GAAP Financial Measures" for further details

Results of Operations

Net interest income for the second quarter decreased $2.5 million to $55.4 million from $57.9 million for the first quarter of 2023, down 4.2%. The decrease was primarily due to an increase in the cost of interest-bearing deposits, partially offset by an increase in interest-earning asset yields. The cost of interest-bearing deposits increased 52 basis points to 3.25% for the second quarter of 2023 from 2.73% for the first quarter of 2023. The increase was due to higher market interest rates and a shift in the composition of the portfolio to higher rate deposits. Average interest- bearing deposits were $3.97 billion for the second quarter compared with $3.79 billion for the first quarter. Average

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loans were $5.94 billion for the second quarter, consistent with the first quarter of 2023. The yield on average loans for the second quarter increased 13 basis points to 5.64% from 5.51% for the first quarter. Second quarter loan prepayment fees were $0.2 million compared with $0.4 million for the first quarter. Net interest margin (taxable- equivalent) for the second quarter was 3.11% compared with 3.28% for the first quarter.

Net Interest Income

Interest and fees on loans receivable(1)

Interest on securities

Dividends on FHLB stock

Interest on deposits in other banks

Total interest and dividend income

Interest on deposits

Interest on borrowings

Interest on subordinated debentures

Total interest expense

Net interest income

1. Includes loans held for sale.

Average Earning Assets and Interest-bearing Liabilities Loans receivable (1)

Securities (2)

FHLB stock

Interest-bearing deposits in other banks

Average interest-earning assets

Demand: interest-bearing

Money market and savings

Time deposits

Average interest-bearing deposits

Borrowings

Subordinated debentures

Average interest-bearing liabilities

Average Noninterest Bearing Deposits

Demand deposits - noninterest bearing

			As of or For the Three Months Ended (in thousands)					Percentage Change
	Jun 30,			Mar 31,			Dec 31,			Sep 30,			Jun 30,		Q2-23		Q2-23
	2023			2023			2022			2022			2022		vs. Q1-23		vs. Q2-22
$	83,567	$	80,923	$	77,123	$	66,976	$	59,855	3.3%	39.6%
	4,126			4,025			3,633			3,271			2,930	2.5%	40.8%
	283			289			289			245			242	-2.1%	16.9%
	2,794			2,066			1,194			958			193	35.2%	1347.7%
$	90,770	$	87,303	$	82,239	$	71,450	$	63,220	4.0%	43.6%
	32,115			25,498			14,900			6,567			2,457	26.0%	1207.1%
	1,633			2,369			1,192			349			370	-31.1%	341.4%
	1,600			1,583			1,586			1,448			1,349	1.1%	18.6%
	35,348			29,450			17,678			8,364			4,176	20.0%	746.5%
$	55,422		$	57,853		$	64,561		$	63,086		$	59,044	-4.2%	-6.1%
				For the Three Months Ended (in thousands)					Percentage Change
	Jun 30,			Mar 31,			Dec 31,			Sep 30,			Jun 30,		Q2-23		Q2-23
	2023			2023			2022			2022			2022		vs. Q1-23		vs. Q2-22
$	5,941,071	$	5,944,399	$	5,877,298	$	5,696,587	$	5,572,504	-0.1%	6.6%
	971,531			980,712			966,299			956,989			945,291	-0.9%	2.8%
	16,385			16,385			16,385			16,385			16,385	0.0%	0.0%
	230,974			192,902			138,476			181,401			136,473	19.7%	69.2%
$	7,159,961		$	7,134,398		$	6,998,458		$	6,851,362		$	6,670,653	0.4%	7.3%
$	99,057	$	109,391	$	119,106	$	121,269	$	122,771	-9.4%	-19.3%
	1,463,304			1,453,569			1,781,834			2,079,490			2,139,488	0.7%	-31.6%
	2,403,685			2,223,615			1,585,798			1,120,149			894,345	8.1%	168.8%
	3,966,046			3,786,575			3,486,738			3,320,908			3,156,604	4.7%	25.6%
	196,776			268,056			197,554			123,370			140,245	-26.6%	40.3%
	129,631			129,483			129,335			129,176			129,029	0.1%	0.5%
$	4,292,453	$	4,184,114	$	3,813,627	$	3,573,454	$	3,425,878	2.6%	25.3%
$	2,213,171		$	2,324,413		$	2,593,948		$	2,717,810		$	2,716,297	-4.8%	-18.5%

1. Includes loans held for sale.
2. Amounts calculated on a fully taxable equivalent basis using the federal tax rate in effect for the periods presented.

			For the Three Months Ended					Yield/Rate Change
	Jun 30,		Mar 31,		Dec 31,	Sep 30,		Jun 30,		Q2-23		Q2-23
Average Yields and Rates	2023		2023		2022			2022		2022		vs. Q1-23		vs. Q2-22
Loans receivable(1)	5.64%	5.51%	5.21%			4.67%	4.31%	0.13	1.33
Securities (2)	1.73%	1.67%	1.47%			1.40%	1.27%	0.06	0.46
FHLB stock	6.92%	7.16%	7.00%			5.93%	5.93%	-0.23	0.99
Interest-bearing deposits in other banks	4.85%	4.34%	3.42%			2.09%	0.57%	0.51	4.29
Interest-earning assets	5.09%	4.96%	4.67%			4.15%	3.80%	0.13	1.29
Interest-bearing deposits	3.25%	2.73%	1.70%			0.78%	0.31%	0.52	2.94
Borrowings	3.33%	3.58%	2.55%			1.24%	1.10%	-0.26	2.23
Subordinated debentures	4.94%	4.89%	4.67%			4.37%	4.14%	0.05	0.80
Interest-bearing liabilities	3.30%	2.85%	1.84%			0.93%	0.49%	0.45	2.81
Net interest margin (taxable equivalent basis)	3.11%	3.28%	3.67%			3.66%	3.55%	-0.17	-0.44
Cost of deposits	2.08%	1.69%	0.97%			0.43%	0.17%	0.39	1.91

1. Includes loans held for sale.
2. Amounts calculated on a fully taxable equivalent basis using the federal tax rate in effect for the periods presented.

Credit loss expense for the second quarter was negative $0.1 million and included a $0.5 million provision for loan losses and a $0.6 million recovery for off-balance sheet items. For the first quarter, credit loss expense was $2.1 million and included a $2.2 million provision for loan losses and a $0.1 million recovery for off-balance sheet items.

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Noninterest income for the second quarter decreased $0.4 million to $7.9 million from $8.3 million for the first quarter. The decrease reflected $0.7 million lower gain on sale income of SBA loans, partially offset by a $0.2 million net increase in service charges and fee income. The volume of SBA loans sold in the second quarter declined to $19.9 million from $29.7 million for the first quarter due to the higher interest rate environment while trade premiums decreased to 7.75% for the second quarter from 7.85% for the first quarter.

					For the Three Months Ended (in thousands)					Percentage Change
		Jun 30,			Mar 31,			Dec 31,			Sep 30,			Jun 30,		Q2-23		Q2-23
Noninterest Income		2023			2023			2022			2022			2022		vs. Q1-23		vs. Q2-22
Service charges on deposit accounts	$	2,571	$	2,579	$	2,742	$	2,996	$	2,875	-0.3%	-10.6%
Trade finance and other service charges and fees		1,173			1,258			1,115			1,132			1,416	-6.8%	-17.2%
Servicing income		825			742			725			635			663	11.2%	24.4%
Bank-owned life insurance income (expense)		271			270			(97)			245			246	0.4%	10.2%
All other operating income		1,811			1,618			1,039			1,656			1,336	11.9%	35.6%
Service charges, fees & other		6,651			6,467			5,524			6,664			6,536	2.8%	1.8%
Gain on sale of SBA loans		1,212			1,869			1,933			2,250			2,774	-35.2%	-56.3%
Net gain (loss) on sales of securities		(1,871)			-			-			-			-	0.0%	0.0%
Legal settlement		1,943			-			-			-			-	0.0%	0.0%
Total noninterest income	$	7,935		$	8,336		$	7,457		$	8,914		$	9,310	-4.8%	-14.8%

Noninterest expense for the second quarter increased $1.5 million to $34.3 million from $32.8 million for the first quarter. The increase was primarily due to a $1.5 million increase in other operating expenses that included a $0.7 million increase in FDIC insurance assessment rates and reflected the absence of a $0.4 million first quarter recovery of a servicing asset valuation allowance and a $0.2 million recovery of other real estate owned and repossessed personal property expenses. All other expense categories were relatively consistent with the first quarter. The efficiency ratio for the second quarter increased to 54.11%, from 49.54% for the prior quarter due to the lower revenue and higher expenses.

					For the Three Months Ended (in thousands)					Percentage Change
		Jun 30,			Mar 31,			Dec 31,			Sep 30,			Jun 30,		Q2-23		Q2-23
		2023			2023			2022			2022			2022		vs. Q1-23		vs. Q2-22
Noninterest Expense
Salaries and employee benefits	$	20,365	$	20,610	$	20,279	$	19,365	$	18,779	-1.2%	8.4%
Occupancy and equipment		4,500			4,412			3,668			4,736			4,597	2.0%	-2.1%
Data processing		3,465			3,253			3,431			3,352			3,114	6.5%	11.3%
Professional fees		1,376			1,335			1,783			1,249			1,231	3.1%	11.8%
Supplies and communication		638			676			683			710			581	-5.6%	9.8%
Advertising and promotion		748			833			974			1,186			660	-10.2%	13.3%
All other operating expenses		3,243			1,957			3,041			2,698			2,463	65.7%	31.7%
Subtotal		34,335			33,076			33,859			33,296			31,425	3.8%	9.3%
Other real estate owned expense (income)		4			(201)			(70)			2			50	-102.0%	-92.0%
Repossessed personal property expense (income)		(59)			(84)			55			(23)			-	-42.4%	0.0%
Total noninterest expense	$	34,280		$	32,791		$	33,844		$	33,275		$	31,475	4.5%	8.9%

Hanmi recorded a provision for income taxes of $8.5 million for the second quarter, compared with $9.3 million in the first quarter representing an effective tax rate of 29.3% compared with 29.7% for the first quarter. For the first six months of 2023, the effective tax rate was 29.5% compared with 29.0% for the same period a year ago.

Financial Position

Total assets at June 30, 2023 declined 1.2%, or $89.2 million, to $7.35 billion from $7.43 billion at March 31, 2023. The decline reflected a $14.1 million decrease in loans receivable, a $41.3 million decrease in cash and due from banks, and a $42.0 million decrease in securities available for sale.

Loans receivable, before the allowance for credit losses, were $5.97 billion at quarter-end, down slightly from March 31, 2023. Loans held for sale, representing the guaranteed portion of SBA 7(a) loans, were $7.3 million at the end of the second quarter, compared with $3.7 million at the end of the prior quarter.

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						As of (in thousands)							Percentage Change
		Jun 30,			Mar 31,			Dec 31,		Sep 30,			Jun 30,		Q2-23		Q2-23
		2023			2023			2022			2022			2022		vs. Q1-23		vs. Q2-22
Loan Portfolio
Commercial real estate loans	$	3,738,325	$	3,784,176	$	3,833,397		$	3,853,947	$	3,829,656	-1.2%	-2.4%
Residential/consumer loans		886,984			817,917			734,473			649,591			521,576	8.4%	70.1%
Commercial and industrial loans		753,456			778,149			804,475			732,030			766,813	-3.2%	-1.7%
Equipment Finance		586,406			600,216			594,788			565,423			537,358	-2.3%	9.1%
Loans receivable		5,965,171			5,980,458			5,967,133			5,800,991			5,655,403	-0.3%	5.5%
Loans held for sale		7,293			3,652			8,043			10,044			18,528	99.7%	-60.6%
Total	$	5,972,464		$	5,984,110		$	5,975,176		$	5,811,035		$	5,673,931	-0.2%	5.3%
								As of
		Jun 30,			Mar 31,			Dec 31,		Sep 30,			Jun 30,
		2023			2023			2022			2022			2022
Composition of Loan Portfolio
Commercial real estate loans		62.6%			63.2%			64.2%			66.3%			67.5%
Residential/consumer loans		14.9%			13.7%			12.3%			11.2%			9.2%
Commercial and industrial loans		12.6%			13.0%			13.5%			12.6%			13.5%
Equipment Finance		9.8%			10.0%			9.9%			9.7%			9.5%
Loans receivable		99.9%			99.9%			99.9%			99.8%			99.7%
Loans held for sale		0.1%			0.1%			0.1%			0.2%			0.3%
Total		100.0%			100.0%			100.0%			100.0%			100.0%

New loan production was $259.3 million for the second quarter, at a weighted average rate of 7.39% while $120.6 million of loans paid off during the quarter at an average rate of 7.21%. Lower loan production reflects lower demand in the higher market interest rate environment.

Commercial real estate loan production for the second quarter was $41.0 million. Commercial and industrial loan production was $36.3 million, SBA loan production was $30.9 million, equipment finance production was $50.9 million and residential mortgage loan production was $100.2 million.

					For the Three Months Ended (in thousands)
		Jun 30,			Mar 31,			Dec 31,			Sep 30,			Jun 30,
		2023			2023			2022			2022			2022
New Loan Production
Commercial real estate loans	$	40,989	$	75,528	$	86,500	$	132,870	$	271,006
Commercial and industrial loans		36,322			27,055			137,902			88,015			96,187
SBA loans		30,926			34,472			53,209			44,898			67,900
Equipment Finance		50,905			69,307			89,193			86,092			95,371
Residential/consumer loans		100,161			97,201			106,955			140,432			111,766
subtotal		259,303			303,563			473,759			492,307			642,230
Payoffs		(120,609)			(124,923)			(121,409)			(139,883)			(230,536)
Amortization		(102,248)			(102,675)			(91,333)			(80,294)			(94,543)
Loan sales		(20,933)			(30,002)			(50,550)			(45,418)			(41,937)
Net line utilization		(28,092)			(30,401)			(43,124)			(78,927)			43,295
Charge-offs & OREO		(2,708)			(2,237)			(1,201)			(2,197)			(606)
Loans receivable-beginning balance		5,980,458			5,967,133			5,800,991			5,655,403			5,337,500
Loans receivable-ending balance	$	5,965,171	$	5,980,458	$	5,967,133	$	5,800,991	$	5,655,403

Deposits were $6.32 billion at the end of the second quarter, up $114.7 million, or 1.9%, from $6.20 billion at the end of the prior quarter. Driving this change was a $198.2 million increase in money market and savings deposits and a $51.7 million increase in time deposits, partially offset by a $128.0 million decline in noninterest-bearing demand deposits. Noninterest-bearing demand deposits represented 34.9% of total deposits at quarter-end and the loan-to-deposit ratio was 94.4%.

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